LONDON/HOUSTON Oct 24 (Reuters) - The Chinese government is limiting domestic production of rare earth minerals in the second half of the year, a move likely to crimp international exports and send prices for the critical materials higher, according to data from Adamas Intelligence.

China is by far the world's largest producer and consumer of rare earths, a group of 17 elements used to make electric vehicles and consumer electronics. The move is already forcing manufacturers to scour the globe for alternative supplies.

For the second half of 2018, China's quota for rare earth separation and smelting has been cut 36 percent, an attempt to better control the market, according to Adamas, a research firm that closely tracks the rare earths industry.

China's decision to limit domestic rare earth production to 45,000 tonnes for the second half of 2018 - announced in August and the lowest in more than five years - provides only enough supply for China's domestic buyers, according to Adamas.

The semi-annual quota had risen to 70,000 tonnes in the first half of 2018, 40 percent higher than the first half of 2017. But that move was largely seen by analysts and electronics manufacturers as a step to legitimize black market production, with Chinese manufacturing consuming most of that supply.

While China is likely to attend to its own needs before exporting, increased exports would require the country to draw on already-low inventories of neodymium (Nd), prasesodymium (Pr) and dysprosium (Dy), used in electric vehicle motors, said Ryan Castilloux of Adamas.

Prices for one key rare earth mineral, PrNd Oxide, could increase by 10 percent to 50 percent within the next 12 months, and is on track to double in price within next five years as demand outpaces supply, Castilloux said.

In September, for example, rare earth exports jumped 15 percent from August levels, despite slipping earlier in the year, according to Chinese government data.

The Chinese Ministry of Industry and Information Technology and the Ministry of Natural Resources did not respond to faxed requests for comment.

WTO FIGHT

China was accused in 2012 of manipulating rare earths exports after it put quotas on overseas shipments in 2010.

In 2012, the United States, the European Union and Japan filed a complaint with the World Trade Organization accusing China of slashing exports to hold down prices for its own manufacturers and to pressure global firms to move to China.

China lost the case in 2014 after the WTO rejected its appeal and it lifted the export quotas.

The U.S. military is worried about China's dominance of the rare earths market, calling it a "significant and growing risk," according to a Pentagon study released earlier this month.

"As they have this standoff with China, eventually they (the U.S.) will need to find alternate sources," said Helen Lau, a metals and mining analyst at Argonaut Securities in Hong Kong, referring to the trade dispute between China and the United States.

However, Lau indicated in a research note on Thursday that the change in the quota was likely tied to the closures of illegal mines in Jiangxi province last month.

"We are not surprised at the quota cuts as China already started a crackdown on illegal mining in Jiangxi province that started in September," she wrote.

Meanwhile Japanese electronics maker Panasonic Corp told Reuters said it is moving to find fresh supply.

"We have been diversifying our procurement channels, building partnerships with our suppliers and working to reduce the use of rare earths," Panasonic said in a statement to Reuters.

MALAYSIAN SUPPLY

Outside of China, Australia's Lynas Corp is the biggest producer of PrNd oxides and the second-largest globally. The company processes rare earth ores from Australia at a plant in Malaysia.

During the quarter that ended in September, PrNd production climbed to a record 1,579 tonnes, the company said in its results on Thursday.

Chief Executive Amanda Lacaze said that demand from Japanese customers was "absolutely buoyant," in a call with analysts after the report.

Lynas's processing plant is under environmental review, raising some concerns that supply could be lost, but for now it remains running.

Overall, prices for rare earths in China have been falling, said Daniel Morgan an analyst with UBS in Sydney. PrNd alloy metal prices in China are selling at 406,000 yuan ($58,400) a tonne, down 24 percent from a year ago, according to data from Shanghai Metals Markets. SMM-REM-PNA

"What the price is telling you, is that there isn't a supply constraint up to now," Morgan said.

Research into rare earth alternatives has come up largely empty, leaving manufacturers beholden to the specialized minerals just as demand for batteries for electric vehicles and other products that use the materials is soaring.